Gold ETF Rewind And Outlook

by: Christian Magoon

Gold - and thus gold ETFs - ended 2011 with a whimper as the price of gold gave up about half its year to date gains from early December through the end of the year. Even so, gold finished its 11th year of a bull market, absolutely crushing the S&P and the U.S. dollar over that time period. Here's a performance chart of gold, the S&P 500 (NYSEARCA:SPY) and the USD going back 11 years, courtesy of

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Gold has crushed the S&P 500 and the U.S. dollar for the last 11 years.

Gold's luster began to fade in early December - at that point it had amassed around a 20% year to date gain - as the EU crisis sent the U.S. dollar surging. Since gold is primarily denominated in U.S. dollars, a stronger dollar meant gold was worth less dollars. In addition, gold was one of the few assets that had made money for investors in a tough 2011 and many began to target gold positions to take profits and raise cash. Finally, concerns that the EU crisis would diminish the consumption of gold jewelry - the number one source of gold demand - in China, India and the U.S. further dampened the price of gold. Indeed by the end of the year gold was even shunned by many notable investors who proclaimed the gold bull market long in the tooth.

In 2011, physical gold ETFs fared the best in terms of performance. Although shedding close to half of their year to date gain in December alone, these ETFs finished with 9% gains. Here is the performance chart of all physical Gold ETFs listed in the United States, courtesy of It is interesting to note that GLD produced the identical performance of IAU for the year, even with an expense ratio 15bps higher.

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Physical gold ETFs gained in 2011, especially versus gold stock ETFs.

Gold stock ETFs were another story. These ETFs suffered from a performance disconnect versus physical gold ETFs. This happened despite many gold stocks - miners and producers - displaying fat profits based off the strong price of gold. GDX, the largest gold stock ETF, and GLD, the largest physical gold ETF, are a great case study to examine the historical performance relationship and the current disconnect. Here's a chart, courtesy of, showing the maximum historical relationship between these two ETFs. See the disconnect getting wider?

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The gap in performance between GLD and GDX is historic.

The gap in performance between these two gold ETFs is notable and has been the subject of countless articles on "why it will continue" and "why it will end." This relationship will be something to watch in 2012.

All gold stock ETFs lost value in 2012, despite gold's gain. GDX, led the pack in terms of performance losing about 16%. GLDX, the gold explorer ETF, was the worst performer for the year. Here's the performance chart of all gold stock ETFs listed in the United States, courtesy

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Gold stock ETFs lost value and disconnected from physical gold prices.

Going forward gold continues to be a hot topic. Is gold in a bubble? Will the U.S. dollar continue to devalue gold? Is gold poised for a run to $2500 after the EU crisis? No matter what the question, here are a few facts to keep in mind.

First, gold just finished the 11th year of a bull run. Second, gold is still only 1% of institutional portfolio assets. Third, gold investment demand hasn't been this high since 1980. Fourth, the two largest countries that consume gold jewelry - China and India - are concerned about growth slowing. Fifth, the EU debt crisis and the U.S. deficit issue have not been solved. So what do all these facts point to in 2012?

Gold ETFs - physical and stock based - will continue to be one of the most watched, most under owned and most misunderstood investments in 2012.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. Christian Magoon is the publisher of